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The argument against raising minimum wage

Other side of the story: What problems might be caused by increasing base pay

Rex Huppke

March 10, 2014

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Remember, folks, last week's column focused on those who favor raising the federal minimum wage. This column looks at those opposed. Don't accuse me of being one-sided — I'm just keeping the two sides separated, so they don't get in a fight.

If "fairness" is the buzzword for those seeking to increase the federal minimum wage, the opposition's preferred term is "blunt instrument." That describes how they view the minimum wage as a means of addressing poverty: It's like chipping away at a problem with a hammer when more precise tools are at hand.

"The minimum wage is just a clumsy anti-poverty program," said Allen Sanderson, a senior lecturer in the University of Chicago's Department of Economics. "I'd rather go after skills and improve skills. I want people to have more command in the workplace, and I want them to have much more than $7.25 an hour. I just don't want McDonald's to be the place where they can make that."

Sanderson and many other economists and public policy experts fear a number of unintended consequences if the minimum wage is raised from its current level to $10.10 per hour, as President Barack Obama has proposed. These include:

•A loss of jobs, as predicted by a recent Congressional Budget Office report, which forecast that total U.S. employment could be reduced by 500,000 jobs.

•The possibility that a higher minimum wage would attract more experienced workers and keep them in lower-wage jobs longer, blocking young people or people with limited work experience from entry-level jobs.

The job loss argument is supported by many different academic studies, though proponents of boosting the minimum wage offer up studies of their own showing negligible effects on employment.

But a widely cited 2006 study by David Neumark, an economics professor at the University of California at Irvine, and William Wascher, deputy director of research and statistics at the Board of Governors of the Federal Reserve System, examined the literature on this issue and found "the weight of the evidence points to disemployment effects."

It also found that "minimum wages may harm the least skilled workers more than is suggested by the net disemployment effects estimated in many studies."

Jonathan Meer, an assistant professor of economics at Texas A&M, in a study released in December, looked at how an increase in the minimum wage affects future job creation. The results were not good.

He found that the "minimum wage reduces net job growth, primarily through its effect on job creation" and that those effects "are most pronounced for younger workers and in industries with a higher proportion of low-wage workers."

That's of considerable concern to people like Sanderson and Craig Garthwaite, an assistant professor of management and strategy at Northwestern University's Kellogg School of Management.

"That's troubling, because I think it's important for people to get into the labor market," Garthwaite said. "Even if these aren't great jobs, they lead to better jobs as your skills improve. That's the idea. I don't think we should be doing anything to dissuade people from entering the job market right now."

The core of the argument here is that the minimum wage is meant to be commensurate with the work skills, education and productivity — at that point in time — of people entering the workforce. The goal, then, is to get in at that wage, develop skills and quickly work your way out of minimum wage and up the pay scale.

Sanderson said a minimum wage of $10.10 per hour might not only attract more qualified workers who would block out less-skilled candidates, it could lure young people out of high school and into jobs that — while low-paying — would be more appealing than ones at the current $7.25 per hour.

"The biggest anti-poverty program we have in the U.S. is getting somebody a job," Sanderson said. "If you're a high school dropout, you may be a lovely human being, but you're virtually unemployable. How do we make sure that five or 10 years from now, that person has reason to become a bigger part of the economy?"

The better approach, according to minimum wage hike opponents, is to put money into education and job preparedness plans, which they say have proven success records. And then improve targeted programs like the Earned Income Tax Credit — which subsidizes low-income working families — to directly help the working poor.

"The minimum wage is poorly targeted, and a fair number of beneficiaries of an increase are not going to be people in poverty," Garthwaite said. "The minimum wage does go to people in poverty, but it also goes to a large number of people who are second or third earners in their family."

According to the CBO report, raising the minimum wage would increase the earnings of low-wage workers by $31 billion. But the report also said only 19 percent of that increase would go to "families with earnings below the poverty threshold, whereas 29 percent would accrue to families earning more than three times the poverty threshold."

In an email, Sanderson wrote: "One would think you could drop money out of a helicopter and poor people would end up with more than 19% of it."

And Garthwaite said: "Broadly, if we decide as a society that we want people to have a minimum level of income, which is perfectly reasonable, there are far more efficient means to do that than a raise in the federal minimum wage."

That's all I have room for this week. Next week I'll analyze the two arguments and see if there's a way to make sense of it all.

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